As Texas Inches Toward a Reserve Power Market, Efficiency Advocates Make Moves

Stephen Lacey is the Editor-in-Chief of Greentech Media. He manages a team of writers focused on solar, storage, efficiency, mobility, and grid modernization. He is producer/host of The Energy Gang and Interchange podcasts, two leading interview and analysis shows on the business of energy and cleantech.

In 1999, Texas became the first U.S. state to implement an energy efficiency resource standard. But last year, it was ranked 33rd in the country for efficiency implementation -- falling behind some states that don't even have legal targets.

Why has Texas done so poorly?

One big problem is the disconnect between the state's goal for utilities and the market structure that helps turn efficiency into a resource. There simply isn't a good mechanism to bring efficiency to market in a manner akin to traditional power generation, say advocates.

"In Texas, efficiency isn't thought of as a resource. So there's been this massive stall, and we've fallen way back," said Doug Lewin, executive director of the South-central Partnership for Energy Efficiency as a Resource (SPEER).

Under the state's law, utilities must meet 30 percent of electric demand growth with efficiency this year. That efficiency is promoted through rebate programs and paid for by ratepayers. But in Texas' grid, operated by ERCOT, there's no way to sell that efficiency directly into the market.

"Efficiency can't get any sort of compensation aside from rebates, which often run out quickly. It's all done outside of the ERCOT market," said Lewin.

SPEER -- an organization made up of dozens of materials producers, manufacturers, engineering firms and efficiency contractors -- is trying to figure out how to reverse that trend.

Last Friday, it may have found an opportunity.

That's when Donna Nelson, chairwoman of the Texas Public Utilities Commission, brought up her support for a mandatory power reserve margin in a meeting. She was backed by newly appointed commissioner Brandy Marty -- shifting the balance of the three-person commission in favor of the change.

That doesn't sound all that exciting. But considering that the PUC has been fiercely opposed to such a measure, the move is making headlines in Texas. And it could also have a big impact on demand response and energy efficiency.

A few years after Texas established its efficiency target, it also deregulated its isolated electricity market. Deregulation wasn't unique to Texas. However, the state took a different approach than other deregulated regions eventually did, creating an energy-only market without a mandatory mechanism to procure reserve capacity ahead of schedule for use during peak times.

That lack of a capacity market means power prices can skyrocket during the summer months as demand comes dangerously close to equaling or exceeding supply. In the summer of 2011, power prices reached $2,500 per megawatt-hour -- 50 times the average wholesale price for electricity -- after exceeding 67,000 megawatts of demand during an extended heat wave. Because the state fell below its voluntary reserve margin, the grid came very close to experiencing rolling blackouts and brownouts.

Independent power provider NRG released a study this August concluding that Texas could face $14 billion in economic losses from power outages over the next fifteen years if the state doesn't change its market structure.

Since then, calls have increased to establish mandatory reserves or a full capacity market in order to better compensate power plant developers for bringing on new supply. Currently, power plants only get paid for the electricity they generate. Proponents of a capacity market say there's little incentive to encourage new development to meet peak demand.

Historically, this idea has not been embraced by Texas regulators, some of who take pride in the state's energy-only market. They worry that creating a new scheme to pay developers ahead of schedule for capacity may drive up power prices. Some also warn that capacity markets may encourage the build-out of centralized fossil-fuel plants, slowing utility investment in distributed renewables.

But efficiency advocates argue that it could unlock new demand-side resources that can get better compensated for their ability to lower power consumption when demand skyrockets. They want to follow the model of PJM and ISO New England, the regional grid operators that have allowed demand response providers to bid into capacity markets and get paid for future efficiency procurement.

Texas probably won't go all the way and develop a full capacity market. But after last Friday's PUC meeting, it's looking increasingly likely that regulators may embrace a mandatory reserve target, which could also open up new ways to compensate delivery of efficiency.

"The last time the market changed this drastically was through deregulation in the '90s. If the market is changing again, it's time to reexamine how efficiency participates," said SPEER's Lewin. "If you have a market where you only have supply, it's like playing football with only one team on the field."

SPEER recently put out a report on how efficiency can play in any new market structure in Texas.

Lewin argues that a reserve target could connect utility efficiency programs to the market itself -- helping energy service providers, home energy management companies and demand response providers get more value for the energy reductions they provide.

Under SPEER's plan, ERCOT could approve certain efficiency measures to play in the market and validate the savings. Those savings could be added to the stack of market bids or stripped from the demand curve. Efficiency providers would be paid the difference between the actual market price for energy and the projected price without efficiency. This is a more complicated idea that would require very tight verification of savings.

The shift within Texas' power market will not come immediately. If changes were to happen, rules likely wouldn't be released until 2015. But as the state creeps toward the biggest market alteration since deregulation, efficiency advocates are throwing themselves into the debate as much as possible.

"This is a huge story," said Lewin. "This restructuring could be transformative. If efficiency companies are not at the table for this, decisions could be made that could impact them for a decade or more."